Coalition rules out People's Bank

Ministers said creating a state-owned bank based on the network would be "time consuming and extremely expensive" but said they were investing 1.3bn over the next four years to put the network on to a firm footing.

Four thousand of the country's largest branches will receive "significant investment" and a new deal means customers will be able to access nearly 80 per cent of bank current accounts through the Post Office.

A pilot scheme in Sheffield will see more public services offered by post office branches, including allowing council tax and rent to be paid over the counter.

But the decision to reject plans to set up a Post Office bank is embarrassing for Lib Dems Ed Davey and Vince Cable, the Post Office Minister and Business Secretary, who campaigned during the election on a manifesto pledge to "improve access to banking for all with a PostBank, revenues from which will also help to secure the future of the Post Office.

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The coalition promised to "look at the case" for creating a Post Office Bank, and 81 MPs backed a Commons motion urging Ministers to set up the bank, which is seen as a way of increasing the availability of credit to businesses and mortgages.

Mr Davey said: "We're determined to turn the Post Office network around and end the years of decline. The Post Office is a tremendous national asset. It will not be for sale and there will be no programme of closures.

"To underline our commitment we have announced 1.34bn of funding over the next four years. The money will put the Post Office on a stable financial footing.

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But John Walker, chairman of the Federation of Small Businesses, said: "Small businesses have had enough of the difficulties they encounter when applying for loans and overdrafts, so any support to change is welcome news – but we are disappointed this is not through a Post Bank, a publicly owned bank run through the post office network around the country.

"This would provide a real solution for those small firms having problems accessing finance and would help keep the network alive."

A spokesman for the National Pensioners Convention, which is part of a coalition pressing for a Post Office Bank, said: "This is an extremely short-sighted decision which will put the future of the Post Office network in jeopardy.

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Eventually Ministers hope the Post Office network will be turned into a John Lewis-style mutual when it is separated from the Royal Mail, which could be sold off.

In the meantime, a deal with Royal Bank of Scotland will mean RBS and Nat West customers can access current accounts at Post Office branches and a series of pilot schemes are being set up to establish how the network can be made more sustainable by offering more public services.

In Sheffield, the council and Post Office Ltd say they can save 240,000 a year by making better use of the cash counters already present in post office branches in a 12-month pilot.

Deputy Prime Minister and Liberal Democrat Leader Nick Clegg, MP for Sheffield Hallam, said: "Sheffield will be a trailblazer in this Government's reform of Post Offices, with Sheffielders able to use the city's Post Offices for a wide range of services, including paying Council Tax and rent."

The Communication Workers' Union accused the Government of "misleading" the public through "propaganda" on Post Office funding, saying that the coalition was giving 360m less than Labour's funding package.